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November 11, 2009

Procurement Function

Procurement Function

Introduction

Business firms or companies have
internal organizations, which perform different functions. Separate functions
are being executed for the efficiency of the company for faster production, for
easier dissipation of information, for clear evaluation of the employees, for
implementation of projects, and for the development of the whole company. The
establishment of different organizations with various functions enables the
companies or business firms to effectively penetrate the market for faster trade
and relations with the consumers or with other business firms as well. This is
even more evident when the company decides to expand, having more organizations
and an increase in the workload.

Business firms are consumers as
well, so as consumers, they are also entitled to purchase good and services.
Constant participation in trade and relations enables business firms to have
reliable contacts and suppliers for better quality of goods and services, which
helps the company in efficient production, and in turn, serve their customers
better. With this kind of chain of reaction, companies continuously develop and
improve their internal organizations in generating success. One of the vital
organizations, which a business firm must thoroughly develop, is its procurement
or purchasing division. The procurement function has a crucial role in the
success of a company, and somehow dictates the rising or the downfall of a
company in the market.

This paper discusses the
procurement or purchasing function of a business firm, its importance in its
internal organization, and the interrelation of organizations. It also
emphasizes on the value-added elements of the procurement function, and its
significance to the company.

Business Organizations and Their Functions

It has been reported that business
enterprises perform certain functions, which are separated in nature but are
closely linked to each other (2006). These business organizations perform eight
basic functions, namely, the management function, the production function, the
human resource function, the finance function, the marketing function, the
communication function, the information function, and the procurement or
purchasing function. The management function is broadly concerned with planning,
organizing, directing, staffing, controlling, and communicating for business
operations, and each businessperson must understand the importance of these
managerial functions for purposes of effective operations (2006). The production
function is concerned with transformation or changing raw materials into
finished goods and services needed by customers (2006)., along with other
organizations, which are also engaged in transformation of inputs. Another
function is the human resource function, which is concerned with managing the
people as an important business resource. The finance function is involved with
the budget and allocation of resources of the company, while the communication
function and the information function focus on the dissipation of information.
The marketing function is concerned with ensuring that goods that have been
transformed reach the final customers (2006).

The procurement or purchasing
function, which is the focus of this paper, influences other functions of the
organization and success of the business. It has been reported that for
businesses to operate successfully, they need an uninterrupted supply and flow
of requirements to perform all their business activities (2006). This situation
can be compared to the acquisition of raw materials of the right quality and
quantity, at the right time and cost or price from the right sources, for the
interruption of the supply of the required materials could also interrupt the
operation of the business.

In relation to other departments or
organizations, good procurement practices will ensure the efficient running of
the operations department, influences production, and marketing. Marketing
depends on efficient procurement practices, and facilitates procurement as well.
The procurement division contact with suppliers and enables them to identify
products with good market potential, and provide this information to the
marketing department, and in turn, the marketing department will require these
products, which have to be produced by the operations department (2006).
Additionally, the personnel or human resource department also depends on
efficient purchase or procurement requirements, as it cuts across the rest of
function. In each of the functions, the value of the people cannot be
overstated, for each function in the business firm requires the use of the human
resource and their potential has to be harnessed to get the best out of them
(2006). Similarly, the finance and the administration departments require
services of efficient procurement, and cut across the variety of business
functions. However, it can be deduced that the procurement department links the
business firms with the external environment, and the perception created by the
procurement department can either improve or damage the image of the business
enterprise (2006).

Elements of the Procurement Function

(2005) reports that
procurement is the common point of contact for departments in an organization, a
central repository for corporate knowledge of acquisition of goods and services
(). Moreover, the author adds that effective procurement departments operate on
a corporate oversight perspective, evaluating the total cost of ownership of
products, providing a durable product while minimizing operational support
costs, and provide assistance in determining alternative acquisition and payment
methods ( 2005, ). In this light, procurement functions compile and analyze
historical data to identify opportunities for cost avoidance, standardization of
goods and services and implement pricing agreements for goods and services based
on volume or critically, and corporate-wide services contracts, consider issues
such as longevity of items and future redeployment of assets, and bring
consistency to due diligence aspects and legal compliance for procurements and
reporting requirements ( 2005, ).

Procurement will not be as
effective without a good quality of customer service. Customer service
determines the sales of the company from outside suppliers, and its success in
the market by adequate interaction with the consumers and with the employees as
well. (1998) reports that in the process of developing customer needs, it would
be extremely beneficial to evaluate the key processes used to complete purchase
transactions. This means some level of continuous improvement and flowcharting
of the procurement flow, perhaps with user assistance. In addition, similarly,
the supplier is also a customer of procurement, and provides ideas and
suggestions for improvement. One of the ways to determine the extent to which
customer needs are satisfied is to conduct a user and supplier satisfaction
survey on a periodic basis, which provide an independent and regular way to
receive customer input so that improvement can occur ( 1998).

Supplier Performance

It has been reported that the
procurement makes the buying decision on selected suppliers and must ensure that
the suppliers meet the user requirements, so the crucial step is to align the
actual measures with those requirements (1998). This could lead the procurement
to evaluate the cause and effect of customer satisfaction, and ensure that
supplier improvement occurs in the key measures.

People Capabilities

Without the right skill sets
and competencies, procurement departments will be unable to participate in the
key activities of the organization and satisfy the needs of users ( 1998). The
quality of the employees has a great impact with the effectivity of the
decision, so assessments must also be done. This assessment can be accomplished
by employing a matrix defining the position and the skills required, which can
also be used to define training and development requirements, job descriptions,
making hiring or promotion decisions, or developing appropriate training (
1998).

Cost Performance

Cost performance must be
tracked and measured to evaluate the total cost of the company. These
procurement organizations have found that although total cost measures are
difficult to establish and maintain, they are a true measure of overall supplier
and procurement performance taking into consideration the supplier quality and
delivery performance, the payment terms, the freight and packaging, tooling, the
warranty costs, and the currency ( 1998).

Future Direction Selling

It has been reported that the
selection of a future direction will govern the organization, the competencies,
the measures, and the performance of the organization ( 1998). Some procurement
departments can develop the direction from the ground-up using the data gathered
from the other parts of the organization, while others can use their
organization to set up the future direction, and definitely need both elements
to achieve both.

Measurement of the Elements

(2006) reports that one of
the most important issues in procurement is the need to prove the business value
of its products and services using more effective performance measurement
practices (). This feedback is essential to demonstrate that procurement is
indeed providing the needed goods and services at the best prices, in a
reasonable period of time, and with a high degree of compliance to procurement
regulations (2006). However, measures that exist are also plagued with problems,
such as technical, financial and institutional obstacles, which make the
measurement of procurement function difficult, expensive to develop and
maintain. Nevertheless, (2006) points out that experience shows that it
can be accomplished with dramatic results, for as benefits, by reduction in the
cost of goods and services, it radically improved throughput times, increased
compliance, and improved client and supplier relations ().

Despite this situation, a few effective
procurement performance measures that are valid, reliable, timely, and
comprehensive are existent, including the PMI or the Performance Management
Index. The PMI is an integrated and index-based performance measure comprised of
component performance measures, which allows the combination of qualitative and
quantitative information yet provides the ability to quantify both so that all
component measures become output or results-oriented (2006, ). In addition, it
is used to provide the strategic, tactical or operational feedbacks at all
levels, and provides the essential feedback to improve procurement
decision-making within the organization by enabling proactive problem solving,
and by institutionalizing continuous improvement (2006, ). It has been reported
that the Procurement Management Index (PMI) has been used successfully to
provide a balanced or systematic assessment of the public sector procurement
function from multiple points of view, which include the challenge function,
cost of goods and services, throughput time, internal procurement costs,
compliance to procurement regulations, issue management and client education,
and overall effectiveness (2006).

Challenge Function.
This is used to challenge the necessity of any goods procurement or
large-scale projects, which aims to provide checks and balances in purchasing
to ensure that the client organization receives value for the funds expended
prior to contracting (Shane and Lafferty 2006, ). The results of the formal or
informal diagnostics determine whether the procurement would be approved,
amended or disapproved, for less complex and costly goods and services.

Service Delivery Measures.
This consists of three components:

1. Cost of Goods and Services, which refers to
the volume change and cost savings obtained through the centralized and
standardized purchase of goods and services.

2. Throughput Time to Acquire Goods and
Services, which refers to the changes in the average throughput time it takes to
conduct a procurement, where throughput time is measured for different types of
commodities and procurement vehicles.

3. Internal Procurement Costs, which refers to
the internal procurement organization costs of acquiring goods and services and
includes staff and operations managing costs.

Compliance.
This component refers to the role of protecting the interests of the
government and the taxpayer, while facilitating the delivery of quality
procurement services.

Issue Management.
This consists of the identification, analysis and resolution of strategic
issues that can impede the functioning of procurement operations when dealing
with clients or suppliers on short, medium or long-term basis, and include
internal organizational issues and those related to client satisfaction and
supplier performance.

Client Education.
This refers to educating and communicating the latest procurement policies,
strategies, new approaches or success stories to clients in an attempt to
anticipate non-compliance by increasing awareness, understanding and effective
use of existing and new procurement rules and regulations.

Overall Effectiveness of Procurement
Operations. This component is
determined by examining the degree of success of each sub-components of the
PMI and making a judgment as to its overall effectiveness on the procurement
function at any point in time.

Conclusion

The procurement function is an essential and
crucial element in the performance of business organizations or firms. It has
been reported that no business can survive without a heavy investment in
under-studying skills of procurement and the benefits of efficient procurement
practices (2006). Procurement function, along with the other functions of the
different organizations in a business firm determines the company’s success in
penetrating the market. It has several elements, which can help in the
development of action plans for improvement, to communicate current and future
goals to the organization, measure their performance and satisfy the goals of
their users (1998).

In spite of the importance of the
procurement function, many business enterprises do not consider its importance,
having little realization, appreciation and acknowledgement of the value an
efficient procurement scheme can have on the performance of the business (2006).
However, in reality, business firms must give importance to procurement
function. When compared with other business organizations, business people
somehow neglect the procurement function but this will be at their own expense
(2006).

Business people thus need to have a
clear understanding of the procurement processes and procedures first, if they
are to benefit when doing their procurements, and second, if they are to get
business with other companies ( 2006). In this way, the company can enjoy its
benefits and advantages, and ensure the existence of the company in the market,
continuing to provide sustenance to its employees and its consumers.